Taxes have been rising across Europe this year, and it looks increasingly like we need to prepare ourselves to pay more tax here in Cyprus too.

Cyprus is on the verge of being the next Eurozone country to receive a financial aid package from the “Troika” of the European Central Bank, European Commission and International Monetary Fund.

The bailout fund is expected to exceed €10 billion, more than half the island’s €17 billion output. Some press reports have it as high as €13 billion. The state needs around €4 billion to cover its financing needs, and the rest will be used to recapitalise the banking sector.

The Troika has submitted draft proposals for the government to save €975 million over the next four years, though the government is reportedly hoping to cut the deficit gap by €1 billion over five years.

It is understood that President Demetris Christofias is looking at tax rises rather than spending cuts, believing there is room for higher taxes, both direct and indirect.

For a start VAT is likely to increase again.

We also understand that the government is considering reducing the taxable threshold for local property tax from €120,000 to €40,000, and also proportionally increasing the tax rates.

We cannot rule out the possibility that it will also look to earn more revenue from income taxes, whether from employment or income from capital. Tax rates here are still comparatively low. Let us look at how Cyprus compares to the other popular destinations for British expatriates.

Looking at tax on investment income, in Cyprus we now pay 15% tax (defence contribution) on bank interest and 20% on dividends. There is still no tax on capital gains from shares and securities.

In Spain, all “savings income” in grouped together and taxed at between 21% and 27%, depending on the amount. In Portugal the fixed rates of tax applied to bank interest and capital gains on securities increased from 20% to 25% last year (30% if the capital is in a tax haven).

Interest is taxed at 24%, dividends at 21% and capital gains at 19% in France, and French residents also pay 15.5% social charges. The government wants to start taxing this income at the scale rates of income tax, so higher earners will pay more tax.

When it comes to the scale rates of income tax, here in Cyprus the top rate is 35% with a relatively high tax free threshold of €19,500. In Portugal the top rate is 46.5%; in Spain 52% and in France a new 45% rate is about to be introduced, plus a temporary 75% rate for income over €1 million.

Spain and France also impose wealth taxes and inheritance taxes; taxes which we have so far escaped here in Cyprus.

Cyprus still applies a favourable tax regime for foreign pension income, and hopefully this will remain in place.

Crackdown on tax evasion

Besides higher taxes governments are also stepping up efforts against tax evasion to help increase tax revenue. Cyprus is also introducing new measures to this effect.

As reported in the Cyprus Mail, the government is looking to agree a withholding tax deal with Switzerland, similar to the Swiss/UK one due to start in January. Besides imposing withholding taxes on future earnings a retrospective one-off levy will be applied to cover past unpaid tax.

The Cyprus Inland Revenue department will also start looking at visible wealth, in this case properties, to see how it compares to information the owner has supplied on his tax return. It has asked the municipal authorities for financial information on properties worth over €500,000 or which cover more than 400 square metres.

It also looks likely that in future every person employed in Cyprus will have to submit a tax return, even if they earn less than the threshold. Currently only around half of employees submit one.

Expatriates in Cyprus have benefited from a relatively benign tax regime so far. However times are changing and it is time to pay more attention to tax planning. Speak to an advisory firm like Blevins Franks to establish the best way to structure your savings and investments to legitimately avoid unnecessary tax.

11th October 2012

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.